Cautioning against higher capex by state-owned companies, Standard & Poor’s today said poor returns on such investments and increase in leverage could weaken their credit profiles in the long term and increase their dependence on the government for support.

In its report ‘Indian government-owned companies’ credit quality will deteriorate in the long run’, S&P Ratings Services said increasing capital spending may have its short-term benefits, but may not be desirable over the long term.

“Poor returns on capital investments and increase in leverage could weaken the stand—alone credit profiles of India’s government—owned companies in the long term. It will also increase these companies’ dependence on the government for support,” S&P credit analyst Mehul Sukkawala said.

It said that even though PSUs benefit from favourable regulations and enjoy easy access to the financial markets and banks, still private companies extract better operating performance from capital expenditure.

“Government-owned companies have consistently engaged in significant capital expenditures, but it has not resulted in a substantial improvement in operating performance. Private companies, on the other hand, have performed better, despite unfavourable regulations and resource allocation due to their focus on efficient use of capital, operating efficiency, and profitability,” Sukkawala said.

The S&P report comes at a time when the government has been nudging state-owned companies to increase their capital expenditure to boost economic activity as investments by the private sector are lagging.

S&P said government-owned companies started from a strong financial position that allows them to undertake substantial capital spending, but their returns on capital have been declining significantly over the past few years.

Returns have declined to about 12 per cent now, from about 21 per cent in 2011-12. They are still better than the 10 per cent for private companies in the heavy industry, but lower than the nearly 15 per cent for the overall private sector.

“We expect returns for private companies to improve, given that they have cut back on capital expenditures and are focusing on improving capacity utilisation and on cutting costs,” S&P said, adding that the government action could play an important role in determining the future of government—owned companies.

The financial positions of state-owned companies have weakened over the past seven years as capital expenditures rose and profitability fell, but their financial positions remain strong, the US—based agency said.

Related Topics